After scoring a hit interview with Bill Nguyen of Color, Jason Calacanis does it again with Bitcon. Why is it important? Why should we care? Let me explain.
The last few years have shown that bankers are probably the worst kind of people to give our money to. They will do the most despicable things and get away with them, because they control our money. So far we had to live with the status quo, because there was no viable alternative to the established monetary systems.
But things are about to change thanks to Bitcoin. It is an Open Source currency, issued by computers running the code that implements a very clever Bitcoin algorithm that can generate a finite number of digital coins. There is no central bank and the system is designed to be anonymous. The Bitcoin algorithm contains a very important safeguard–anyone with a special computer can “mint” those coins, but nobody can flood the market with extra fake coins, because the algorithm will generate no more than a preset number of coins. So, no king, parliament, or central bank can dabble with the currency supply.
The algorithm, the mint software and the client software are Open Source which means that anyone can download it, work on it and share his or her work with others. The power over the development of the project is distributed, so is the responsibility. The algorithm and the code are open to public scrutiny and since there is no central bank that issues bitcoins and the algorithm limits the total number of coins it can generate, the whole process is transparent and the rate of the currency supply is completely transparent. Nobody can mint some extra coins on the side and inject them into the system unnoticed.
As Gavin Andresen and Amir Taaki explain in the interview, every bitcoin is accounted for in a distributed database that gets passed from peer to peer between the participants in the Bitcoin monetary system. The Bitcoin database stores the bitcoin ID, the sender ID and the receiver ID, the user data is anonymous unless the users want to advertise their Bitcoin IDs. What is really interesting about bitcoins is the fact that they are like ordinary coins you and I carry in our pockets; they are stored on your computer and if your computer disks crash, you loose your bitcoins just like you would loose your coins if they fell out of a hole in your wallet. But unlike ordinary coins, you can keep their copies on a USB drive, backup tape or online backup. You can recover your lost cash from backup in seconds or minutes. Compare that with the weeks you have to wait for the banks to give you your money back when the ATM you are using malfunctions and you don’t get the cash yet it is marked as withdrawn from your account.
Since there is no central database, nobody can lock your account or prevent you from sending or receiving bitcoins, which is a very important feature as we move towards a cashless society in which it will be very easy to cut off electricity, water, money, and food by simply shutting down one’s bank account. In a way, Bitcoin is the answer to a number of questions we should be asking banks and governments about the future of our money. Of course, that totally takes away the power of governments to seize accounts of people, companies, banks, or other governments. Ooops!
I agree with Jason that Bitcoin is like Linux—a game changer that will spawn hundreds, if not thousands of startups and new ideas about money. Which is a good thing, I also agree with Jason that banks and governments will fight it. Which is a bad thing, because we desperately need innovation in that sector.
Why do I think the banks will fight it? The history of virtual money might give us a clue about what is going to happen to Bitcoin. The first popular internet currency was e-gold, which was an interesting experiment that ended up in law enforcement stepping in and shutting the operation down. As was expected, just like any other currency, criminals had started to use e-gold to launder money. Only when criminals use paper money nobody is trying to shut down the central bank that issued the notes. The case of e-gold should serve as a reminder to those who want to compete with the international network of banks–those guys don’t like competition.
But it is not all doom and gloom. Bitcoin may not replace all the money in the world, but I think there might be governments brave (mad?) enough to switch to it. Also, banks could use a few ideas from that project if they actually care about money.
What if that doesn’t happen? Amir Taaki suggests a possible application for Bitcoin as a currency used in online games. I don’t think it is too outrageous to think that Apple could implement their own economy based on a variant of Bitcoin as a feature of the Game Center. Too wild a though? Linux was supposed to be a worthless toy, too.
If you want to know more about Bitcoin, watch This Week in Startups #140. If the CIA wants to know more about it, shouldn’t you?
